The SEC’s Misguided New Mission: Foreign Government Regulatory Change-Agent

Section 3(f) of the Securities and Exchange Act of 1934 provides a clear mandate for Securities and Exchange Commission (SEC) rulemaking:

“[T]he Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.”

The SEC mission is to protect investors and the securities markets. Last year, Congress decided to alter and expand this mission. But it didn’t amend the Exchange Act. Instead, Congress made its changes through two obscure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These sections convert the SEC into a foreign policy-making agency. Dodd-Frank Sections 1502 and 1504 require new SEC rules which will force some industries doing business overseas to disclose information which, in turn, can be used to pressure foreign governments into altering their behavior or impose new regulations.

Dodd-Frank Section 1502 requires the SEC to devise rules requiring those companies which utilize “conflict minerals” (tantalum, tungsten, gold, etc. from the Congo) to report the origin of those minerals annually. With this provision, Congress has enlisted the SEC in the “corporate social responsibility” activists’ “name-and-shame” campaign, which is aimed at forcing companies to help stop the humanitarian crisis in the Congo. A recent WLF Legal Backgrounder describes this provision and argues that it runs afoul of public companies’ First Amendment rights. We also focused thisLegal Pulse post on it.

Dodd-Frank Section 1504 is even more ambitious. Troubled that it can’t force oil-rich foreign governments to act more responsibly, Congress has conscripted the SEC to do its bidding. Section 1504 mandates new SEC rules on disclosure of payments made by companies to U.S. and foreign governments “for the commercial development of oil, natural gas, and minerals.” Never mind, as one comment to the SEC’s proposal reminds everyone, that “over 90% of the world’s oil reserves are owned or controlled by National Oil Companies, none of which will be required to comply” with the rule. And never mind that the SEC’s proposal treads on President Obama’s recent Executive Order on Improving Regulation when it cites compliance costs of $11.9 million dollars but offers no stated benefits for investors, the market, or capital formation.

The rule, proponents like George Soros argue in their comments, is worth every penny because the information will empower citizens in countries such as China, Venezuela, Angola, and Iran to push for similar disclosure laws and stop oil and mining company money from funding wars and lining despots’ pockets. A high-minded goal for sure, but is this really a job for the SEC, and won’t such mandates end up harming U.S. companies and our competitiveness?

Short of repeal of Section 1504, however, we’re stuck with this ludicrous law, and the SEC must do all it can to limit its unintended (or, perhaps, intended) consequences when finalizing its rule. SEC must grapple, for instance, with the fact that numerous countries explicitly prohibit the disclosure of resource extraction payments made to government entities. Also, as former Federal Trade Commission Chairman Timothy Muris commented, public release of detailed resource extraction price and cost information can facilitate collusion in violation of U.S. antitrust laws. Such disclosures will certainly give competing foreign (and government-owned) extraction companies a dual competitive advantage: 1) they will learn sensitive commercial information and adjust their own costs to undercut U.S. competitors and 2) they won’t have to bear the compliance costs of disclosing this data.

SEC should, as many comments argue (full list of comments here), limit disclosures to only projects which are “material” to the public company, and define “projects” in such a way that it curtails repetitive and overlapping reporting. It should also resist the calls of activists to require that companies’ specific, detailed reports to SEC be made public. SEC should instead compile the reports and data, and release a compilation of this information to the public.